Putting things in perspective for Cayman

| 26/04/2010

Groucho Marx famously said, “The secret of life is honesty and fair dealing. If you can fake that, you’ve got it made.” He also asked a rhetorical question, “Is this a game of chance?” To which he answered, “Not the way I play it.” Had Groucho been alive to read the recent SEC Complaint against Goldman Sachs and Mr Tourre, he would doubtless have smiled and lit a cigar.

The SEC civil suit against Goldman Sachs regarding the Abacus 2007 transaction (one of many thousands of similar vehicles domiciled in Cayman) has again caused certain commentators to raise the issue of reputation and the risk-reward for Cayman and to ask, “Where were the [Cayman] regulators?”
It is not necessary to delve into the complexities of the CDO, CDS etc market, the nature of the instruments themselves or the underlying assets. As others have pointed out, the Cayman vehicle, Abacus, that issued the US$150,000, 000 bonds to the unfortunate German bank was a perfectly legal and very common structure. So were the various derivative agreements that existed within and outside the Abacus vehicle. If and to the extent there was questionable legal or ethical behaviour or abuse, it occurred outside Cayman and outside the Abacus structure not within it. Abacus (and thus Cayman) may have been an unwitting cog in a “Sting” operation where the outcome of the horse race was pretty well determined or known beforehand by those who (like Robert Redford) controlled the crucial pieces of (undisclosed) information. If so, Abacus itself may have legal causes of action against GoldmanSachs and others (and commensurately it may also be dragged into civil litigation as a defendant). That litigation may be in Cayman and/or elsewhere. All well and good. That is part of the resolution process.
In the Parmalat, Enron and Worldcom cases, the offending actions were also committed by key players outside Cayman. And in those three famous criminal cases appropriate punishment was delivered in the appropriate jurisdictions. In the case of the SEC action against Goldman Sachs (and possibly others still to come), we will have to wait and see how it plays out. But we should not lose sight of the fact that the current action, albeit by a regulator, is a civil one not a criminal one, and the enforcement action is being brought in the most appropriate place. It may well be that the authorities in Germany and the UK will also take regulatory action as two of the institutions that lost out are located there. Again these are appropriate jurisdictions.
I seriously question whether any amount of advance and cost effective due diligence by a Cayman regulator or Cayman service provider (such as local directors and professional advisors) could have uncovered and deterred in advance the behaviour the SEC is now claiming occurred. After all, no regulator or relevant party in the USA, UK, the Netherlands or Germany (all these jurisdictions were involved) picked up on any flaws in advance. So when there are calls here for regulation of these types of activity or local enforcement in order to protect Cayman’s reputation, I do not see any way of doing so cost effectively, other than Cayman deciding that there should be no structured finance/debt transactions domiciled here at all. And perhaps no hedge funds writing or buying derivatives either.  No risk, no problems and also no rewards. As Tony Travers has so succinctly put it, this would adversely impact everyone – Government, the businesssector and the wider community as a whole – given the very significant aggregate direct and indirect revenue to the Islands from this business.
It is trite to say that we are all in favour of deterring and punishing crooks. And there are many things Cayman should worry about and address, such as getting its own domestic financial house and immigration regime in order and improving its regulatory, enforcement and business models for future success. But shooting ourselves in the foot by shutting down a large percentage of our legitimate and valuable financial industry at a stroke because the SEC files a civil fraud claim against Goldman Sachs is not one of them.
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  1. tim ridley says:

    I indeed listened to most of the Hearings before Levin yesterday. As far as I know, there was no mention of the Cayman Islands at all. And certainly none of the usual Levin hyperbole and inaccuracy in accusing the offshore world of all sorts of unsubstantiated heinous behaviour. So in that limited context, the feared reputational damage to Cayman did not occur. That may of course not be the last we hear of it.

    The Hearings highlighted what is a huge problem in the industry (and not just Goldmans) – who is the client, what are the obligations to the client and how and when are they owed? Likewise, what are the oblgations to those who are not clients? And what are the obligations when there are several clients on different sides of the transaction? These issues will no doubt be explored in great detail in the media and before the court in the SEC proceedings (unless they are settled first). And maybe some better rules and conduct will result. To reiterate, I do not believe the deal ‘hid’ anything in Cayman. All of the claimed material misconduct took place elsewhere. The same outcome would have occurred had Abacus had been domiciled in Delaware or Ireland.

    As I have said, I hold no brief for Goldmans or their behaviour. The (I suspect deliberately) naive and uninformed answers of the Goldman’s team stalled the Senators getting to the jugular and many would think that the Goldman’s team coach told them just to suck it up and run out the clock. That is fine as far as it goes in the short term, but the bigger impression is that the Goldman team cared little for what they were doing as long as it made money for Goldmans and themselves. That may do them real reputational harm in the long run and will not help pass sensible regulatory reform. But what would you expect from an organisation whose current CEO came up the ranks as a trader, i.e. little different from a second hand car dealer. 


  2. slowpoke says:

    I hope you got to watch or read some of the the GS testimony today. Sending internal emails that repeatedly state that it is a "s***ty product", but at the same time making it a sales priority, suggests dubious ethical behavior at best.  I really hope that my bankers/investors, have a little more concern for my interests rather than the big bonus.

    Since you focus on what is "legal", kindly respond as to whether unilaterally changing a signed, written, dated, employment contract in Cayman is "legal". 

  3. tim ridley says:

    Dear Bloggers,

    The Abacus structure (a bankruptcy remote, off- balance sheet Cayman company, owned by a charitable trust) was and is perfectly common, proper and legal. Such structures have been used for more than 25 years for very many legitimate and successful transactions sourced in many countries around the world.

    The fact that this structure may in certain cases have been abused by some of the players outside Cayman is a different matter. I hold no brief for Goldmans and their behaviour in the Abacus or in any other cases. The courts (most logically elsewhere) are the proper forum to determine their legal liability, if any.

    Bonnie and Clyde and John Dillinger drove Fords, but as far as I am aware noone has ever suggested that the Ford Motor Company be closed down as a result. So Cayman should not rush to dismiss or ban a legitimate product.

    • Shock and Awe says:

      We’re not intent on rushing into anything Tim.  Like love, you can’t rush into it.  And, like love, money works in mysterious ways!  CDO’s, SPV’s, whatever. But we still cannot hide the fact that "someone" tried to hide "something" by using the jurisdiction of Cayman and it is this perception that people, and regulators, have grasped onto.  Mention to anyone that you live and work on Cayman, and you will get  "Cayman? Is that right wink wink nod nod."  The question is were we in part responsible for this?  In large part yes because we allowed, or turned a blind eye, to shady transactions of this nature.  It will take some serious convincing to ensure people now that CDO’s in general, are not Weapons of Mass Destruction.  I say turn the ba*t—rds involved in these types of transactions in BEFORE they come looking.  Which is what should have taken place.  And didn’t.   Why??  Is it because people here made money off Abacus?  Hmmmmm…..do you think they may have?  Wink wink nod nod.

      Another proper analogy:   When a spotlight is turned on everyone gets lit up, regardless.

      • frank rizzo says:

        I agree with Tim in that I am willing for this to be sorted in a court of law rather than the court of public opinion and perception. 

  4. Anonymous says:

    This is all fine and good, but if a securities dealer is selling securities they created, they are obligated by law to disclose all the material and pertinent information about those securities.

    • frank rizzo says:

      Are the buyers really complaining?  I haven’t been following this closely at all but from my experience the initial buyers were usually large institutional entities, other broker-dealers, and otherwise sophisticated, high net worth investors.  They are not the ones who are screaming fraud because they know how the game is played.  Now the ones who are screaming are the small investors who bought pieces from the broker-dealers.  They were never intended to be end users but none of the big players wanted to hold on to this stuff and if they can get rid of it they will.

      My hunch is that the disclosures were made to the intended investors but the intended investors are not going to ask GS if they would buy any of this stuff.  Would you expect GS to tell Merrill their business?

    • Dick Shaugneary says:

      What is wrong with the word "obliged"?  "Obligated" is just plain ugly.

      CNS: Anonymous has used the correct word. "Obligated" relates to something you must do whether you feel like doing it or not. "Obliged" has to do with your moral responsability.

  5. anonymous says:

    The Abacus vehicle stank to high heaven, legal or not; anyone defending it is either morally bankrupt or simply naive.

    • Alan Nivia says:

      Why?  If Goldman took a negative position on the US housing market and other investors took a positive view of the market what is wrong with selling products to reflect the different market views?  Nothing.  This is just Goldman envy.  Everyone knew there was a bubble.  There is a lot of money to been made on the way up on a bubble, the difficult thing is to know when to get out (still got those internet stocks from 1998?).  

  6. Shock and Awe says:

    Tim, I can’t agree with your hope that Cayman’s exposure vis a vis Abacus may be limited or forgotten. Also, to call the Abacus vehicle "perfectly legal and very common" was a misprint or misspoken.

    Emails within Goldman have recently been released, among them from Fabrice Tourres, a Goldman executive. Here he describes Abacus and I point this out because as you say Abacus does have a connection to Cayman.

    At the time, Mr Tourre was putting together a synthetic collateralised debt obligation called Abacus 2007-AC1. "a thing which has no purpose, which is absolutely conceptual and highly theoretical”. He added: “It sickens the heart to see it shot down in mid-flight … it’s a little like Frankenstein turning against his own inventor”.

    Later, he goes on to describe the situation in this way:

    “The whole building is about to collapse any time now,” Mr Tourre wrote to his girlfriend. “Only potential survivor, the fabulous Fab … standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!” according to an email in the SEC case. “Anyway, not feeling too guilty about this.”

    Goldman may have made money but they were morally bankrupt.

    Doesn’t sound too good for anyone connected with Abacus does it? Including us.

    To worsen the situation, the public is now finding out certain things about the operations of certain organizations affliated with us:

    "Investment banks such as Goldman Sachs were not simply market-makers, they were self-interested promoters of risky and complicated financial schemes that helped trigger the crisis," Sen. Levin said. "They bundled toxic mortgages into complex financial instruments, got the credit rating agencies to label them as AAA securities, and sold them to investors, magnifying and spreading risk throughout the financial system, and all too often betting against the instruments they sold and profiting at the expense of their clients."

    This…. is going to need more than a light dusting.

  7. Tom McCallum says:


    With regard to need to update legislation and lead, not follow, I am reminded of a Viewpoint column I wrote for CNS…. back on Oct 29th, 2008.


    plus ca change, n’est ce pas ?


    • Goosed says:



      I recall seeing this when you penned it. As you know the successive Governments have an Ostrich like mentality and there is no enthusiasm from the industry leaders to change many of our laws as they all have deep and inherent conflicts  interest to do so.As most of the service providers such as auditors derive their business from the lawyers, they too will not rock the boat. Talk about vested interests.

      Some weeks ago we heard about a committee set up to review our laws under the chairmanship of a wellknown lawyer. His committee consists of another five lawyers. Nothing has been heard since. It always amazes me why everyone is so complacent when so many others are willing to give up their time to help out in order to keep Cayman ahead of the game.

  8. Chris Johnson says:

    I tend to agree with these thoughts on the Goldman Sachs issues but Tim firmly hits it on the head with his remark about Cayman getting its own domestic house in order including regulation. Todays Financial Times refers to transparency of hedge funds and the issue of funds being based other than Cayman. There is a very good chance we will lose business if we do not improve our laws and regulations.Some of our laws are totally inadequate including our Companies Law some of which goes back to 1862. Our laws have to be updated with more transparency so Cayman can be seen to be whiter than white. Our competition, the BVI, the Channel Islands and Bermuda consistently update their laws. Cayman needs to be a leader not a follower.Can we please have some action.